May 22, 2013

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Plan for Tax Day with Proper Record Keeping

May 13, 2013 By

Most taxpayers heave a sigh of relief moments after filing their taxes, stash away related documents, look forward to their tax refunds, and wait for next year’s tax day. Though taxpayers have more than ten months to prepare for next year’s tax filing season, the majority suffer from procrastination; only remembering about tax filing a few weeks or days before the tax day. This poses the danger of missing out on important tax deductions, possible errors that could beckon an IRS audit, or even missing the tax filing deadline, which might attract hefty fines and interests.

The secret to successful tax filing lies in proper record keeping, which can best be achieved through the following three main ways:

1. What Are Your Possible Tax Deductions And Credits?

Tax payment and filing can be hectic, but they pay off if you claim tax deductions and credits you are eligible to. You must therefore, project any possible credits and deductions you are likely to be entitled for during the year. Assuming that you enroll your children to a daycare, you might qualify for a Child tax credit. Just keep an eye on your expenditures and ensure that you have the tax ID number of the childcare provider. The same applies to eligible deductions as a result of making donations to charities, use of business cars (where you have to keep track of the mileage by using a log), amongst others. You have to be informed about what will happen during the year to successfully keep necessary tax documents for easy tax filing.

2. Design a Filing System

A properly organized filing system is the gateway to stress-free tax filing. You must ensure that everything is organized by carefully labeling your files like “tax receipts” or related items. Similar documents must be filed in appropriate files, which have to be kept at an easy-to-access place like your desk or convenient drawer. In the beginning, it might appear a bit tricky and tedious, but with time, you might even start doing it without having to think about it. The same applies to tax documents like W-2s, which should be safely stored as soon as you retrieve them from your mailbox. When you finally start filing, it will be a breeze.

3. Go Digital in Record Keeping

The best way to safely keep your tax records for a very long time and for speedy future access is to store them in paperless form. This is very convenient and easy; just create a file on your computer or even in the cloud where scanned tax documents can be saved. There are some apps like the Shoeboxed that are helpful in storing digital versions of your receipts. You can even use your smartphone to capture the image of the documents and digitally file them away.

Since tax documents contain very sensitive information, taxpayers are encouraged to use passwords or encryptions. Regular back ups are also important so that you don’t lose the information. For simplified tax filing, plan in advance and keep the necessary tax documents.

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Higher Education Tax Credits for You

April 8, 2013 By

It is common knowledge that education is vital. Secondary education is viewed as something that is worth the financial investment of tuition, books, etc. However, these costs can get tremendous. However, there is good news: Uncle Sam understands that education is important offers some important tax credits you can take advantage of to foot the higher education expenses for your family or yourself.

There are two main higher education related tax credits you can claim; the Lifetime Learning Credit and the American Opportunity Credit. Note that these are credits designed to offset education expenses. These are not deductions and therefore, extend a bigger bite off your tax burden. The main difference between a tax deduction and a tax credit is that the former can chop off your taxable income while a credit is actually directly deducted from the final tax amount owed.

American Opportunity Credit: This is an improved version of Hope Educational Assistance Credit, and was created in as part of the stimulus bill in 2009. With the American Opportunity Credit, you can claim up to $2,500 which is higher than the $1,800 that the Hope Educational Assistance used to give. Furthermore, 40% of this credit is refundable, which means that you can get back up to $1,000, even if you don’t owe the IRS any taxes.

The full American Opportunity Credit can be claimed by anyone who earn up to $80,000 for single filers or double the amount for married and joint filers. Single filers earning up to $90,000 or $180,000 for joint filers can still claim a reduced credit amount.

Just like other credits and deductions, the American Opportunity Credit also has some restrictions. One notable limitation is that you can only claim costs incurred through the very first four years of college. Sadly, it is short-term and poised to expire in 2017 unless Congress extends it.

Lifetime Learning Credit: This is a credit that actually lives up to its name, and best suited for educational expenses exceeding the four undergraduate college years. This means that you can claim it for your undergraduate degree, graduate education and even professional degree courses. If you took a qualifying course to boost your current job skill sets or even secure a brand new job altogether, then this credit can help pay part of the costs.

The credits is applicable to all eligible education costs in a taxpayer’s family. This means that if you and your child incurred education expenses of about $10,000 each that meet the IRS guidelines, then you can claim for both of you. However, these expenses don’t directly translate to a tax relief; instead, you can claim up to 20% of your qualified lifetime education expenses.

For the 2012 tax year, you can claim the Lifetime Learning Credit if you have less than $52,000 of modified gross income for single filers or $104,000 for married joint filers. The amount of the credit will be cut if you earn between $52,000 and $62,000 if you file a single return or between $104,000 and $124,000 if you are married and file jointly.


Coordinating Credits: Unlike the Lifetime Learning credit that can be claimed by both the parent and the child, the Coordinating credit can only be claimed by either the parent or student. To be eligible, you have to pay the postsecondary tuition and fees for dependent, spouse or yourself. This means that if you claim a student as a dependent, you are barred from filing this credit. The credit can however, still be claimed even if you received a distribution from a Coverdell Education Savings Account or an eligible tuition program, so long as tuition or Coverdell funds are not used to cover the costs you use to claim this education credit.

Please note that you cannot claim both the Lifetime Learning Credit and the American Opportunity Credit for the same student in the same year, you have to choose one, but it is possible to claim multiple credits for different students.

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Why You Need to File Your 2012 Tax Return

March 4, 2013 By

The IRS expects all individuals who earned any form of income in 2012 to file tax returns in 2013. This will however, depend on various factors like your age, the amount of income earned in 2012, the received income type, as well as the filing status. Even though you may not be required to file, you still might find it beneficial to go ahead and file. Filing a tax return makes it possible for you to claim some tax credits you are eligible for or even refunds if too much federal income tax was withheld from your pay by your employer.

Discussed below are five main reasons you might still find it necessary to file the annual return even if you are not obliged to.

1. Claim Refunds: Did you make any estimated tax payments? Was your federal income tax withheld by your employer? Did you have a tax overpayment the previous year that applied to the current year’s tax? If you answered yes to any or all of the above questions, then you sure will want to file your return to claim a refund from the IRS.

2. The EITC: You might be eligible for Earned Income Tax Credit if you earned less than $50,270 in 2012. This is reimbursed tax credit given to eligible taxpayers as a tax refund. Furthermore, you can be entitled to up to $5,891 if you have qualifying children. To claim this credit, you must file a tax return; find out if you qualify by using the EITC Assistant.

3. Health Coverage Tax Credit: To meet the requirements for this credit, you should be receiving payment benefits from the pension benefit guarantee corporation, alternative trade adjustment assistance or the reemployment trade adjustment assistance. Eligible taxpayers can get a 72.5% tax credit of the amount paid for your qualified health insurance premiums. Dependents and spouses can also qualify.

4. American Opportunity Credit: Are you, or do you support someone who is a student? The American Opportunity Credit is a partially refundable credit that benefits students in their first four years of post secondary education. You can get up to $2,500 via this credit, and even if you don’t owe any taxes, you may be eligible for as much as $1,000 for every qualified student. To claim, file the IRS Form 8863, Education Credits which should be submitted alongside the tax return.

5. The Extra Child Tax Credit: Parents with not less than one eligible child but don’t receive the complete value of the Child Tax Credit can be eligible for the extra refundable credit. To claim, file the new Schedule 8812.

For a comprehensive list of all income tax filing requirements, visit the IRS website. At the site, you will find filing requirements and guides on how to file crucial IRS tax Forms 1040, 1040A or 1040EZ.

 

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Education-Related Tax Breaks You Should Claim

February 18, 2013 By

Taxpayers with school-aged children can take advantage of various state and federal government tax breaks. Have you been making use of sales tax holidays on chosen items that your son or daughter needs for school? You can save some pocket money for your kid by shopping smart on select items in your state. Congress has over the years, introduced a number of tax programs aimed at helping students and their parents cover school and college education expenses.

Eligible taxpayers and/or students can apply for credits like the Higher Education Tuition Deduction, the American Educational Opportunity Credit and Lifetime Learning Credits, the Qualified Tuition Program (QTP) and even educational IRAs. Each of these is subject to different qualifications and cover diverse education-related costs. You must understand the set criterion, monitor your income and comprehend the expenses before applying to any of the tax breaks.

You must be aware of the fact that the government is constantly modifying these programs while others expire. It is therefore, important to find out what is still in place and requirements before making an application. Congress can choose to reinstate the expired programs but it is up to you to make necessary inquiries before applying. It is also paramount that you keep appropriate tax records and receipts like:

  • Education IRAs and QTPS transactions
  • Scholarships, grants, and student loans records,
  • Receipts for purchasing books & supplies
  • Tuition fee payment receipts, amongst other documents.

If you have more than one child in school or college, make it a point of keeping two or more separate documents, depending on the number of children. Even though some schools have detailed account information on their websites, you shouldn’t rely on them despite the fact that they may be reliable-you will still need the bookstore receipt for books or related purchases.

Education credits are not exclusively designed to benefit parents and students alone. Teachers can also claim refunds for any unreimbursed out of pocket expenses. If you are a qualified educator, and you incur any out of pocket expenses on classroom supplies, keep the receipts, and claim a refund from the IRS.

Proper record keeping allows tax preparers to accurately evaluate various education programs and advise on the most suitable program. Last minute rushes in April, especially just before the tax day, are highly discouraged. Keeping the tax records as you incur the expenses helps reduce errors on your tax returns and makes it possible to claim all credits or refunds you qualify for.

 

 

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Five Significant Home Improvements Tax Breaks

February 7, 2013 By

Fixing your house can be tedious and costly. Many individuals don’t even bother with renovations. Furthermore, repairs to your main residence don’t have any immediate tax benefits. Even though they boost the basis, which is advantageous when working out gains or losses if you choose to sell it, the expenses are not deductible on your tax return when you file. There are however, a number of exceptions to the basic tax rules, but, based on your specific needs, there are several tax breaks you can claim.

1. Energy Credits: The IRS accords eligible taxpayers an energy tax credit for home improvements related to energy efficiency or purchasing of energy efficient electrical equipments. Some of these breaks have already expired, but you should check with relevant state and federal (IRS) authorities to establish what is still valid.

2. Casualty Loss: There are some repairs that you are compelled to do as a result of a fire, a tornado, hurricane, or any other disaster you may be affected with. You qualify for some tax breaks based on the casualty/loss rule.

3. Rental Real Estate Expense: Taxpayers who rent out sections of their primary homes can deduct home repair costs linked to the rental part of the home.

4. Home Office Deduction: If you have a home office and claim home office deductions, you can claim some home repairs deduction done on an authentic home office. See to it that the prorated part/room is accurate as sporadic use doesn’t qualify for the deduction. There are several rules related to home office deduction; ensure that you understand them well.

5. Deductions of Medical-Related Improvements: There are some improvements that are not aesthetic in nature, but mainly triggered by the need to accommodate a disabled member of the family, like a spouse or dependant. You can deduct the improvements that don’t affect the value of the house and include the whole cost as a medical expense. They may cover things like support bars, porch bars, wheelchair ramps, amongst others. Don’t forget that you can only deduct medical costs if they exceed 7.5% of your AGI-Adjusted Gross Income.

These tax breaks and related rules can be confusing, but you have to understand them. Consider the nature of the improvement; if it can be purchased and moved around, then it is not deductible. However, if the improvement is permanently affixed on your house and you cannot move it away from the house, treat it as a capital improvement, it adds to your basis.

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Using Your Home Renovation to Lower Your Tax Bill

January 28, 2013 By

Using Your Home Renovation to Lower Your Tax Bill
Power consumption and resultant bills at home consumes a large chunk of many people’s monthly utility budgets. However, you can lower your power bill by installing some energy systems like solar, water or electricity, wind or geothermal systems for your home and take advantage of the IRS 30% home renovation tax credits on Form 5695.

State-Specific Deduction

Different states have varied requirements for the energy-related relief-find out yours by visiting energy.gov. The website not only lists state tax rebates, but also other utilities and manufacturers’ guides that have been narrowed to specific cities, counties and even communities. This way, you can access more relevant information on qualified energy systems. Furthermore, it is also possible to establish whether the utility company you have in mind is interested in repurchasing your surplus energy production. This way, you can kill two birds with a single stone; generate some income in the sides, lower your tax bill, and claim the tax relief.

The IRS incentives have been designed purposely to bring down energy systems installation costs. As much as it is not possible to lower these costs to zero, you can possibly get over 50% of your expenses back.
Related Tax Breaks

This is not the very first time Uncle Sam is offering energy related tax breaks. In 2011, for example, a limited tax relief for residential renovations exceeding $500 was introduced. The credit initially covered installation of weatherproofing like double-paned windows, insulations, amongst others. Some states discontinued this credit, while others still offer it (find out from your respective state authorities if it still exists.)

Improvements Resulting in Medical Tax Deductions

There are a number of home improvements that can lead to medical tax deductions. If you live with a disabled person and choose to install ramps and railings or get rid of any obstructions in the home/house, install special bathtubs, pools or even spas for medical reasons, the expenses can be deducted as medical costs. The claim must however, be supported by written documentation from a qualified physician explaining the need for the improvements.

Bear in mind that medical costs must exceed 7.5% of your Adjusted Gross Income to be deducted from your tax return. In some cases, the improvements or adjustments may boost your home’s market value. In such cases, you have to cut the medical costs by the increased value. There are times when such expenses are reimbursed by the medical insurance or employer-don’t claim a deduction if the expense has already been refunded.

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The Expanded EITC Checklist to Curb Fraudulent Claims

January 4, 2013 By

An extra page was added to the 2012’s Form 8867 (Earned Income Tax Credit checklist) which is usually completed by tax preparers to document their due diligence whenever a taxpayer’s return contain the Earned Income Credit. This is not a new form actually, as it has been around for over ten years now, but it was only in 2012 that the IRS made it a mandatory inclusion for all returns applying for the EITC.

Enacted in 1975 to help taxpayers with children offset their Social Security taxes, the refundable Earned Income Tax Credit (EITC) aids low income families. At the time of its enactment, the credit was set at 10% of wages up to $4,000 but was expanded in 1986 and consecutive years. Currently, it is no longer reserved for taxpayers with kids as those without can also claim. In 2011, the maximum claimable credit was $5,700 and over $60.4 billion in claims was paid by the IRS after processing 27.4 million returns. There are 23 states that have introduced their own variations of the credit to help specific needs of their populace.

Despite the significance the EITC program to the lives of many families, it has been accused of being a fraud lure. In May 2011, the TIGTA found that between 23% and 28% of the EITC payments were not correctly applied. In 2009 alone, between $11 and $13 billion was improperly claimed and awarded. It is because of this anomaly that the IRS now requires all tax preparers to carryout due diligence to ensure that taxpayers are eligible, or risk a $500 fine for each client they qualify but are found ineligible.

Other than checking the EITC qualifications, Form 8867 also asks for some documentation provided and any follow up questions tax preparer asked to verify issues like income or residence. Tax preparers therefore, have an extra task to ensure that the document that taxpayers present are legitimate and if anything seems odd, investigate, or demand to see some proof.

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Lessons from Top 3 Tax Mistakes when Filing Taxes

December 31, 2012 By

“Everybody makes mistakes” is a common saying that many individuals, who end up in a mess they create, normally turn to for solace. Unfortunately, when it comes to taxes, it is acceptable but comes with serious consequences, some that might leave you with a few extra dollars on your tax bill. We can however, learn from every mistake we make in life. Below are some common tax mistakes that tend to haunt taxpayers. If you haven’t committed any of them, ensure that you don’t; they are serious blunders..

1. Errors Related to the First-time Homebuyer Credit
Taxpayers love credits, but the IRS has perfected the art of tightening the rules around every credit they introduce; and first time home buyer credit was not an exception. First, the qualifying home must have been your primary personal residence for not less than 36 months at the time of claiming, (and not 35, 30 or 22). Many rushed to sell their home without understanding the restrictions, only to count their losses thereafter.

Taxpayers who were savvy enough to ask for professional help were guided, some choosing to stay a little longer to qualify as opposed to joining in the excitement only to be hit by reality later. To avoid the repayment, one has to repay the credit up to the value of the profit. If you sell at a loss or even get evicted, it might lead to no repayment or having to repay smaller amounts. Be warned that if the loan you took exceeded the price of the house, it is very possible that you owe more of the credit than you might have projected. Alternatively, rent out some rooms if you cannot afford the house, it allowed.

2. 401 (k) or Retirement Plans Withdrawals
You can withdraw money from your IRA account to cover medical insurance or for a house down payment. As much as you can avoid early withdrawal penalties by doing this, due taxes remain intact. Furthermore, the waiver on penalties is only applicable to IRAs and not job-related plans like 401 (k) or 457. If however you need money badly, you can borrow up to 50% of the account balance ($50,000) tax-free, and pay back yourself over the years. Alternatively, move the funds into your IRAs first from the retirement plans and then withdraw. Finally, get a credit card loan, which has lower rates than federal and state tax penalties.

3. Spouse’s Retirement Funds in Divorce
The Tax Code contain a special provision that allows waiving of penalties and taxes whenever the court orders a distribution from one spouse’s retirement plan that should be paid to the former spouse, a Qualified Domestic Relations Order (QPR). You can evade the 10% early withdrawal penalty by taking the money and cashing it all or cashing it all into the bank account, but you will have to pay taxes on cash you don’t necessarily need currently. The best way out is to split distribution into two funds; withdraw the much you need currently and stash the rest in an IRA.

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Five End-of-Year Payroll Tips for Small Business Entrepreneurs

December 26, 2012 By

The holiday season is here and to small business owners, it is time to make some extra sales; some that might have remained elusive all through the year. It is also the time to put final touches on one’s end-year tax planning to reduce the tax risks that usually set in at this time of the year, some involving payroll issues. To guide you, here are a few tips that might help.

1. It is Time to Hire a Vet: To be entitled to the Expanded Tax Credit, you have up to Dec 31st to hire a veteran. You can claim up to $9,600 per worker for employers running for-profit businesses or $6,240 for tax-exempt organizations. The amount you can claim for the credit is determined by the period the vet has been employed, number of hours worked and the wage amount paid. You will qualify for maximum credit if the vet is disabled.

2. Year-end Bonuses: You must bear in mind that the bonuses you give your employees are subject to payroll tax withholding, payment of FUTA taxes, employer matching of FICA, and Medicare taxes. You can choose to give a flat year-end bonus like $1000 as opposed to $923 after withholding, but remember to ask the payroll provider to gross up from the net amount. If you pay bonuses but fail to process payroll, the IRS and the state tax agency will simply classify the bonus as wages, and you will be punished for a mistake you could have avoided.

3. Analyze Fringe Benefit Packages: Find out from the IRS publication 15 if there are any pre-tax fringe benefits available. If there are, consider offering employees fringe benefits in place of standard raises to help lower your tax liability. You can save money in payroll taxes by offering benefits like health vision and child-care help. Your employees will also like these tax free benefits.

4. Employee Preparation for 2013: Ask your employees to assess the number of exemptions they claim and complete new W4 Forms. Those who claim exempt must submit a new Form W4 by February 18th. The IRS Publication 505 should be used to set the withholding amount to be taken and exemptions to claim.

5. Payroll Preparation: As you post payroll to the accounting program, patch up to have the gross wages matched with the year to date wages on the payroll report. Keep the employer-paid payroll taxes as a separate line item on the profit and loss statement and assign the withholding from paychecks to a current liability account on the balance sheet. Remember that payroll expense on Schedule C or other business income tax return must match the totals reflected on Form W3.

The secret to timely tax filing is proper preparation, the earlier you work on your tax returns, the better it is for you.

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Common Tax Scams You Must Watch Out for and Avoid

November 20, 2012 By

Some tax crooks come up with very tempting but blacklisted tax ideas and strategies that pose serious legal consequences like hefty fines and even imprisonment if detected by the IRS. There are numerous tax scams that taxpayers are warned against and must be avoided like plague.

Identity theft cases have been increasing recently; a situation that has prompted the IRS to launch a comprehensive strategy to fish out the culprits who file falsified returns and use fake refund schemes. Taxpayers are advised to timely report to the IRS Identity Protection Specialized Unit whenever they believe private information has been leaked and used without their knowledge or approval. Please visit the IRS website for more information on this.
Taxpayers are also warned by the IRS against sharing any personal or financial information through email with individuals pretending to work for the IRS. The IRS does not contact taxpayers requesting for any sensitive personal information through unsolicited emails. Such correspondences must be reported to phishing@irs.gov immediately. Another scam involves fake tax preparers who take advantage of the tax filing season to steal from taxpayers seeking tax preparation services. As much as there are many professional and legit tax preparers, there are a few who float their clients’ refunds or inflate their fees or even promise exaggerated refunds. You must therefore, choose your tax preparer carefully and only after serious scrutiny.

Taxes are everyone’s responsibility and tax evasion is a criminal offense. Some taxpayers choose to stash their loot in offshore bank accounts for personal reasons – normally to evade paying taxes. Those found guilty of this offense face serious penalties or even serve a term behind bars. Furthermore, there are some scams on Social Security, especially for the low income earners or senior members. Taxpayers have to be alert and watch out for such scams and report to the IRS immediately.

The IRS encourages taxpayers to claim tax refunds to lessen their tax obligations. These refunds must however, be genuinely earned with actual income earned and expenses incurred. Some taxpayers however, choose to inflate their income or expenses to earn more tax credits like the Earned Income Tax Credit. This could only result in high interests, penalties, or even a prison sentence.

Other common scams that the IRS is trying to stamp out include fake Form 1099 refund claims, outlandish tax scams and arguments, false claiming of zero wages, misuse of charitable organization tax breaks, misusing trusts, or faked corporate ownership. The IRS has tightened its rules and anyone caught practicing any of these scams will face the full wrath of Uncle Sam.

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